Zhuhai CosMX Battery Co., Ltd.'s (SHSE:688772) recent weak earnings report didn't cause a big stock movement. However, we believe that investors should be aware of some underlying factors which may be of concern.
See our latest analysis for Zhuhai CosMX BatterySHSE:688772 Earnings and Revenue History April 28th 2022
A Closer Look At Zhuhai CosMX Battery's Earnings
As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
For the year to March 2022, Zhuhai CosMX Battery had an accrual ratio of 0.53. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of CN¥1.8b, in contrast to the aforementioned profit of CN¥741.5m. We also note that Zhuhai CosMX Battery's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥1.8b.
That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.
Our Take On Zhuhai CosMX Battery's Profit Performance
As we have made quite clear, we're a bit worried that Zhuhai CosMX Battery didn't back up the last year's profit with free cashflow. For this reason, we think that Zhuhai CosMX Battery's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Zhuhai CosMX Battery as a business, it's important to be aware of any risks it's facing. For example, we've found that Zhuhai CosMX Battery has 4 warning signs (1 doesn't sit too well with us!) that deserve your attention before going any further with your analysis.
Today we've zoomed in on a single data point to better understand the nature of Zhuhai CosMX Battery's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.